Work in progress

Question 1

Work in progress:

Audit risks and procedures

Answer 1

justification:

• subjectivity in allocating oh costs
• overhead figures based on management accounts which may be incorrect
• cost overruns on fixed term contracts may result in loss making contracts
• management may deliberately overstate wip in order to strengthen financial statements

Procedures

• test of controls over posting of purchase invoices and payroll transactions
• obtain and review workings for overhead allocation
• reperform overhead allocation based on management accounts
• test of controls over production of management accounts
• compare actual overhead costs to budgeted costs to indicate any loss making contracts
• inspect ageing wip to assess whether any provisions needed against unrecoverable WIP
• test reliability of management accounts